Explore the benefits of economic and political diversification in Iceland, presented at the 17th Annual Conference on European Integration. Discover how double diversification spurs growth by attracting economic activity and redistributing political power, ultimately leading to improved democracy and economic growth. The evidence shows a positive correlation between economic diversification, political diversification, and growth, emphasizing the importance of a diversified economy and political landscape.
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Presentation Transcript
Economic and Political Diversification and National Risk: The Case of Iceland 17thAnnual Conference on European Integration organized by the Swedish Network for European Studies in Economics and Business (SNEE) and held at The Grand Hotel, M lle, 19-22 May 2015 Thorvaldur Gylfason and Per Magnus Wijkman
Double Diversification One-way street with two lanes Economic diversification away from too much dependence on a few industries or resources toward a broad economic base Political diversification away from too much dependence on narrowly based political elites through fortified democracy E.g., Mauritius before and now Application to Iceland
Nordic Countries Benefited from Double Diversity Economic diversification (acquired) Spurs growth by attracting economic activity from excessive reliance on primary production in agriculture or natural-resource-based industries Political diversification (inherited from past) Spurs growth by redistributing political power from narrowly based ruling elites to the people, often replacing an extended monopoly of power by democracy, encouraging widely shared education Two sides of same coin: Diversity pays
Double Diversity is Good for Growth Economic diversification is good for growth Share of manufactures in total exports Herfindahl index of export diversification Political diversification is also good for growth Polity2 index of democracy (from -10 to +10) Freedom House index of democracy (from 7 to 1) Failure to diversify economy stifles political diversification and hurts growth potential
Evidence: From Economic and Political Diversification to Growth From Diversification to Growth From Democracy to Growth 12 12 Log of GNI per capita 2012 (USD, ppp) 11 11 10 10 9 9 8 8 7 7 y = 0.1365x + 8.6387 R = 0.3835 y = 0.0291x + 7.7054 R = 0.3929 6 6 5 5 0 20 40 60 80 100 -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 Manufactures exports 1962-2012 (% of total) Democracy 1960-2012 (from -10 to 10)
Evidence: From Economic and Political Diversification to Growth From Diversification to Growth From Democracy to Growth 12 12 Log of GNI per capita 2012 (USD, ppp) 11 11 10 10 9 9 8 8 7 7 y = 5.5806x + 6.9028 R = 0.4668 6 6 y = -0.5516x + 10.913 R = 0.5389 5 5 0 0.2 0.4 0.6 0.8 1 8 6 4 2 0 Export diversification index 1996-2012 Democracy (Freedom House) 1972-2014
Side by Side: Different Aspects of Economic and Political Diversification From Diversification to Growth From Democracy to Growth Manufactures exports 1962-2012 (% of total) 12 100 10 90 8 80 6 Democracy (Polity2) 1960-2012 70 4 60 2 50 0 8 7 6 5 4 3 2 1 0 40 -2 30 -4 20 -6 y = 127.71x - 6.2616 R = 0.5312 10 -8 y = -1.3147x + 6.3225 R = 0.155 -10 0 0 0.2 0.4 0.6 0.8 1 -12 Export diversification index 1996-2012 Democracy (Freedom House) 1972-2014
Iceland: Insufficient Economic and Political Diversification Level and composition of exports 1957-2012 (%) Capture of democracy by special interests EU application on ice Fisheries policy on ice Constitution on ice, despite acceptance by 67% of voters in 2012 referendum; bill is designed to resolve all three issues via EU referendum Fishing fees to put a stop to Russian-style natural resource management One person, one vote 70 60 50 40 30 20 10 0 1993 2001 1957 1961 1965 1969 1973 1977 1981 1985 1989 1997 2005 2009 Fish Aluminum Exports of goods and services Manufactures exports 1962-2012 (% of total)
Iceland: Crash of 2008 plus 33% Depreciation Creates Opportunities Composition of GDP 1980-2013 (% of GDP) Foreign tourist arrivals 1995- 2012 (number of persons) 80 800000 70 700000 60 600000 50 500000 40 400000 30 300000 20 200000 10 100000 0 Agriculture Fisheries Manufacturing Services 0 1980 2013 1995 1997 1999 2001 2003 2005 2007 2009 2011
Conclusion Iceland s failure to diversify economy has damaged democracy and growth potential Crash of 2008 created opportunities for economic diversification via tourism as well as for political diversification through a new post- crash constitution designed to boost democracy and growth through Electoral reform ( one person, one vote plus more national referenda) De-Russification of natural resource management (market-based fishing fees under public ownership)
